Triple-A benchmark yields rose Tuesday, outperforming U.S. Treasuries, which sold off amid worries a ban on Russian oil imports would exacerbate inflationary pressures, while equities saw wide swings to end in the red.
Municipal to UST ratios showed the five-year at to 78% (down from 81% Monday), 92% in 10-years (down from 95%) and 95% in 30 (down from 96%), according to Refinitiv MMD's 3 p.m. read. ICE Data Services had the five at 77% (down from 79%), the 10 at 96% (down from 98%) and the 30 at 96% (unch) at a 4 p.m. read.
In the primary Tuesday, Wells Fargo Bank held a one-day retail order period for California (Aa2/AA-/AA/) for $2.221 billion of general obligation bonds. The first tranche, $1.458 billion of various purpose general obligation bonds, saw bonds in 4/2023 with a 5% coupon yield 0.98%, 5s of 2027 at 1.61%, 5s of 2032 at 2.00%, 5s of 2047 at 2.48% and 3.125s of 2052 at 3.25%, callable in 4/1/2032.
The second tranche, $763.165 million of various purpose general obligation refunding bonds, saw bonds in 4/2023 with a 5% coupon yield 0.98%, 5s of 2035 at 2.10%-2.22%, 5s of 2037 at 2.28%-2.59%, 4s of 2042 at 1.59%, 5s of 2042 at 2.19%-2.39%, callable 4/1/2032 at par.
California last priced $1.842 billion of GOs in March 2021. The issuer saw spreads of +12 (Bloomberg BVAL) on its five-year, +13 on its 10-year and +11 on it's 20-year, all with 5% coupons. It's long bonds, 2.5s of 2049, were +87 and 3s of 2049 at +62.
Block trading of California GOs has shown wider bid-ask spreads in recent weeks. A California 5 of 9/2030 traded at 1.87% (+5 Refinitiv MMD's California scale).
Refinitiv MMD's California scale moved higher Tuesday with the five-year at 1.53% (+13 AAA), the 10-year at 1.93% (+22) and the 30-year at 2.36% (+23).
J.P. Morgan Securities priced for Howard University (/BBB-/BBB-/) $300 million of taxable bonds, Series 2022A. Bonds in 10/2052 with a 5.209% coupon yield at par, callable in 10/1/2032.
J.P. Morgan Securities priced for Virginia Electric and Power Company $137.5 million of bonds. The first tranche, $37.5 million of non-alternative minimum tax pollution control refunding revenue bonds, Series 2008C, from the Industrial Development Authority of Louisa, Virginia (A2/BBB+//) saw bonds in 11/2035 with a 1.65% coupon yield at par with a mandatory put date of 5/31/2024, noncall.
The second tranche, $100 million of non-alternative minimum tax recovery zone facility revenue bonds, Series 2010A, from the Industrial Development Authority of Halifax County, Virginia (A2/BBB+//) saw bonds in 12/2041 with a 1.65% coupon yield at par with a mandatory put date of 5/31/2024, noncall.
In the competitive market, the Board of Trustees of the University of Alabama (Aa2/AA+/) sold $162.7 million of University of Alabama at Birmingham general revenue bonds, Series 2022-A, to BofA Securities. Bonds in 10/2022 with a 5% coupon yield 1.00%, 5s of 2027 at 1.59%, 5s of 2032 at 1.95%, 4s of 2037 at 2.29%, 3s of 2041 at 2.88%, 3s of 2047 at 3.02% and 3s of 2051 at 3.06%, callable in 4/1/2032.
The market awaits another billion-plus deal from the New York City Transitional Finance Authority set to price $1.042 billion of taxable and exempt future tax-secured subordinate bonds Wednesday. The
Returns so far in March are in the red for munis. The Bloomberg main muni index is at negative 0.37%, high-yield at negative 0.51%, taxables at negative 0.29% and impact at negative 0.50%.
“That apparent friction in tax-exempt prices is not just about
Separately managed account support has helped to liquefy the short end of the curve once yields were high enough to cover management costs, but these accounts won't be able to drive munis much richer, he said.
Dealer inventories are also being cut, with the average of non-VRDO dealer positions in the first quarter of 2022 returning to the lows of 2021. Fabian said it’s doubtful those capital withdrawals would reverse as long as a lack of fund demand signals high potential negative volatility.
And this may be contingent on inflation numbers, which are unfavorable as a result of Russia's invasion of Ukraine and subsequent international sanctions, he said. Oil prices may double in the next weeks, and grain prices will rise, both of which would have a direct impact on global GDP, according to Fabian.
He said the UST curve was flattened by 30 basis points in February, and MMA's triple-A benchmark curve is currently 70 basis points steeper than the UST curve from a 2s/30s perspective, the greatest divergence since the first quarter of 2019.
This, combined with reasonable confidence in the Fed's ability to control inflation in the medium-term, low ratios, minimal negative muni credit trauma from the war, and a slowing of outflows, suggests a potentially appealing entry point for buyers, particularly for better coupons that provided liquidity previously, Fabian said.
“But things remain highly uncertain; a payment default by Russia could have knock-on/systemic consequences for the taxable financial markets, from which munis are now less well insulated,” he said.
Secondary trading
Maryland 5s of 2024 at 1.22%. Prince George's County, Maryland 5s of 2024 at 1.17%. Howard County, Maryland 5s of 2024 at 1.11%-1.09% versus 1.11% Friday. Virginia Resources Authority 5s of 2025 at 1.39%.
Anne Arundel, Maryland 5s of 2026 at 1.49%. Henrico County, Virginia 5s of 2026 at 1.43%. Maryland 5s of 2027 at 1.49%. Mecklenburg County, North Carolina 5s of 2027 at 1.46%.
Maryland DOT 5s of 2029 at 1.71%. Howard County, Maryland 5s of 2029 at 1.57% versus 1.45% original. NYC Municipal Water Finance Authority 5s of 2030 at 1.84%. California 5s of 2030 at 1.87%. Baltimore County, Maryland 5s of 2030 at 1.85% versus 1.60% original. Maryland 5s of 2031 at 1.74%.
New York City waters 5s of 2034 at 2.14% versus 1.96% Friday and 1.94% original. Washington 5s of 2037 at 2.16%-2.14%. Ohio Water Development Authority 5s of 2038 at 2.06%. Iowa Finance Authority green 5s of 2039 at 2.10%-2.09%. Connecticut 5s of 2041 at 2.42%.
NYC waters 5s of 2045 at 2.56%.-2.54% versus 2.47%-2.45% Friday and 2.36% original. LA DPW 5s of 2047 at 2.41% versus 2.31% original. LA DWP 5s of 2051 at 2.46%-2.45%. Piedmont, California 5s of 2051 at 2.40%.
AAA scales
Refinitiv MMD's scale saw four to five basis point cuts at the 3 p.m. read: the one-year at 0.90% (+4) and 1.14% (+4) in two years. The five-year at 1.40% (+4), the 10-year at 1.71% (+5) and the 30-year at 2.13% (+5).
The ICE municipal yield curve was cut four to six basis points: 0.89% (+4) in 2023 and 1.17% (+5) in 2024. The five-year at 1.41% (+5), the 10-year was at 1.76% (+6) and the 30-year yield was at 2.16 (+7) in a 4 p.m. read.
The IHS Markit municipal curve was also cut: 0.90% (+4) in 2023 and 1.17% (+4) in 2024. The five-year at 1.44% (+4), the 10-year at 1.72% (+4) and the 30-year at 2.10% (+5) at a 4 p.m. read.
Bloomberg BVAL saw two to sis basis point cuts: 0.87% (+3) in 2023 and 1.09% (+2) in 2024. The five-year at 1.41% (+3), the 10-year at 1.71% (+5) and the 30-year at 2.12% (+6) at a 4 p.m. read.
Treasuries were weaker while equities were in the red.
The two-year UST was yielding 1.612% (+6), the five-year was yielding 1.791% (+8), the 10-year yielding 1.857% (+8), and the 30-year Treasury was yielding 2.224% (+5) at the close. The Dow Jones Industrial Average lost 184 points or 0.56%, the S&P was down 0.72% while the Nasdaq lost 0.28% at the close.
Inflation/stagflation?
With the consumer price index coming out Thursday, economists are still divided about inflation’s path and whether stagflation will become an issue, especially with the Russian invasion of Ukraine adding uncertainty.
Dean Baker, senior economist at the Center for Economic and Policy Research, expects “some moderation” in the February CPI read. “Most notably, we may finally be seeing vehicle prices beginning to level off and come down,” he said.
Another reason for optimism, he said, “some of the big price increases in [the] January [report] were one-time increases, with companies using the new year as an opportunity to increase prices.” Notably, prescription drugs and cereals and bakery products saw big increases that won’t be repeated.
Rent prices need to be monitored, Baker said, since private indexes show bigger increases than the CPI does, which “has led many to expect an acceleration in the rental indexes, some of which we have already seen.”
But, he noted, with eviction moratoriums ending, should the number increase, it would “mean more vacant units will be on the market and put downward pressure on rents.”
Inflation will lead to a recession, said CIO of AE Wealth Management Tom Siomades. “Higher prices will increase inflation and eventually put us in recession,” he said. “We are still worrying about ideology and the environment, but the problem is we are swapping an economic/energy crisis for a perceived climate crisis, that’s what the markets are telling us and they do not like it.”
But stagflation is a problem, according to Jeffrey Gundlach, CEO of DoubleLine. “I think we need to start admitting that we're running into a stagflation situation,” he said.
That will make life difficult for members of the Federal Open Market Committee, Gundlach said. The Fed will need to be aggressive to fight inflation, he said, especially since rates are currently so low.
Not only does he expect price pressures through the end of the year, Gundlach said, “we're going to be constantly underestimating inflation because we have all of this stimulus that takes time to go through the system.”
Consumer sentiment reading suggest “the recessionary risk is going up very substantially,” he added.
Additionally, Gundlach said, “historically oil shocks have led to demand destruction that causes recessions,” with a 50% rise considered the spike needed. “Well, it's done that very substantially in just a few months,” he said, “so I think that we're going to start hearing the word stagflation a lot more.”
Although he expects four Fed rate hikes by late summer, “it's not enough. The inflation rate is so high compared to the interest rate that it's going to take some real action” to curb inflation. “A flat yield curve at these yield levels sends a monstrous signal that the economy could be entering period of fragility.”
But David Kelly, chief global strategist at JPMorgan Funds doesn’t expect recession. First, with the pandemic “fading,” it could unleash a “huge pent-up demand for travel, entertainment and leisure services and greater spending in this areas in the months ahead could offset cutbacks elsewhere caused by higher gasoline prices,” he said.
Also, the strong labor market will help stave off a downturn. “Ukraine will undoubtedly hurt business confidence,” he said. “However, starting from such an excess demand for workers, U.S. labor markets are likely to remain tight throughout the year.”
Finally, Kelly said, the government response will keep the economy strong. “Congress and the administration are acutely aware of the economic hardship inflicted on lower-income consumers from higher food and energy prices,” he said. “This increases the possibility of some further fiscal spending in a reconciliation bill and reduces the risk of higher taxes.”
The Fed will tighten less than expected and provide advance notice, Kelly said.
“The pressure on the U.S. economy so far does not look sufficient to push America into recession,” he noted. “While there is every reason to be cautious and very well diversified in the short run, long-term investors should still be thinking about how to position portfolios for the long run when both the pandemic and, hopefully, the impacts of Putin’s invasion of Ukraine are in the rear-view mirror.”
The Russia-Ukraine conflict pushed up energy and grain prices, noted Grant Thornton Chief Economist Diane Swonk. “The timing couldn’t be worse, as it is adding fuel to an already well kindled inflation fire,” she said. “The risk is that the inflation we are experiencing becomes more entrenched.”
The Fed will increase interest rates and cut the size of its balance sheet, she said. Fed Chair Jerome “Powell must walk a tightrope, balancing rate hikes with the need to avoid a larger pullback in credit markets,” Swonk said. “A Fed-induced recession is much easier to recover from than a credit crisis; 2008 and 2009 taught us that.”
But if the Russia-Ukraine conflict is prolonged, she said, it “could boost oil prices further and trigger a full-blown recession.” But prices would have to be sustained around $125 a barrel through the third quarter in addition to rate hikes for it “to trigger a recession.”
Primary to come:
The
The Regents of the University of Michigan (Aaa/AAA//) also has $582.74 million of taxable general revenue bonds, Series 2022C, on the docket. Goldman Sachs.
The New York City Transitional Finance Authority (Aa1/AA+//) is set to price Wednesday $978.45 million of tax-exempt future tax-secured subordinate bonds, consisting of $780.45 million of Fiscal 2022 Series D Subseries D-1, serials 2023-2034 and 2037-2041 and $64.405 million of Fiscal 2022 Series E, serials 2022-2030. Jefferies.
The New York City Transitional Finance Authority (Aa1/AA+//) also is set to sell $198 million of taxable future tax-secured taxable subordinate bonds, Fiscal 2022 Subseries D-2, in the competitive market at 10:45 a.m. eastern Wednesday.
The University of Massachusetts Building Authority (Aa2/AA-/AA/) is set to price Wednesday $559.565 million, consisting of $351.95 million of taxable project revenue bonds, Senior Series 2022-2, serials 2024-2037, terms 2042 and 2052 and $207.615 million of taxable refunding revenue bonds, Senior Series 2022-3, serials 2022-2037, term 2041. Citigroup Global Markets.
Denver Public Schools, Colorado (Aa1/AA/AA/) is set to price Thursday $345 million of general obligation bonds, Series 2022A. Stifel, Nicolaus & Co.
Northwest Independent School District, Texas (Aaa//AAA/) is set to price $289.255 million of taxable unlimited tax bonds, Series 2022, serials 2022-2045, insured by Permanent School Fund Guarantee Program. RBC Capital Markets.
Allen Independent School District, Texas (Aaa/AAA//) is set to price Tuesday $221.595 million of taxable unlimited tax bonds, Series 2022, serials 2022-2044, insured by Permanent School Fund Guarantee Program. RBC Capital Markets.
Jefferson Parish Consolidated Waterworks District No. 2, Louisiana (/AA//) is set to price Tuesday $177.745 million of water revenue and refunding bonds, Series 2022, serials 2023-2042, insured by Build America Mutual. Stifel, Nicolaus & Co.
The Hospitals and Higher Education Facilities Authority of Philadelphia (Baa3/BBB/BBB/) is set to price Wednesday $173.905 million of revenue bonds, Series 2022, serials 2035-2042. RBC Capital Markets.
Nova Southeastern University, Florida is set to price Tuesday $150 million of taxable corporate CUSIP bonds, Series 2022. Morgan Stanley.
The Dormitory Authority of the State New York (A3/BBB+//) is set to price Wednesday $148.015 million of tax-exempt The New School Revenue Bonds, Series 2022A. Goldman Sachs.
Louisiana (Aa3/AA-//) is set to price Tuesday $121.25 million of gasoline and fuels tax second lien revenue refunding bonds, 2022 Series A. Morgan Stanley.
The Northern California Power Agency (Aa3//AA-/) is set to price Thursday $119.72 million of Hydroelectric Project Number One revenue bonds, 2022 Refunding Series A, serials 2024-2032. Citigroup Global Markets.
The District of Columbia Water and Sewer Authority is set to price Thursday $100 million of public utility subordinate lien multimodal revenue bonds, Series 2022E. RBC Capital Markets.
